Bankruptcy Fraud is a broad category involving crimes that exploit the bankruptcy process. The bankruptcy system is grounded on the assumption that a debtor will make full disclosure of their liabilities and assets, so regulations and laws are put in place to protect the bankruptcy system and creditors. Bankruptcy Fraud is governed by federal laws and is handled by the federal government. It can be enforced both criminally and civilly. In one Bankruptcy Fraud scenario, a debtor may hide some property and fail to disclose his or her ownership of it in their bankruptcy petition. Since creditors can only use assets a debtor discloses, failing to disclose the property allows a debtor to keep the asset from the creditors it should be going to. In other cases, a debtor may file bankruptcy petitions in multiple states, or file under multiple false or stolen identities. In other scenarios, debtors bribe or attempt to bribe creditors not to file claims against the debtor. However, it’s not just the debtor that can be liable in a Bankruptcy Fraud case. Third parties who knowingly receive property from a debtor who has filed a bankruptcy petition can also be charged. Some Bankruptcy schemes involve “consultants” that claim they will stop an eviction or foreclosure on behalf of a debtor, but instead they file a bankruptcy petition on behalf of the debtor without telling the debtor, pocketing the fees and ruining the debtor’s credit.
Due to the lengthy nature of investigations of this kind, you should seek legal advice from an experienced federal defense attorney as soon as you become aware that you could potentially be the subject of an investigation or under threat of indictment.
Bankruptcy Fraud could encompass a number of charges, such as concealing assets, filing false forms, fraudulent transfer of assets, and filing multiple bankruptcy petitions.
Bankruptcy Fraud schemes range from acts committed by individuals who file false forms in their bankruptcy petitions to highly orchestrated bustouts involving third parties who falsely promise clients a stop to foreclosure proceedings, but who instead file bankruptcy petitions on behalf of the debt without their knowledge. In other Bankruptcy Fraud schemes, a third party may be charged for accepting property from a debtor they know has filed a bankruptcy petition.
Many crimes are related to Bankruptcy Fraud and include, but are not limited to, bribery, bank fraud, and identity theft.
Under the United States Code, Bankruptcy Fraud is committed when “a person who, having devised or intending to devise a scheme or artifice to defraud and for the purpose of executing or concealing such a scheme or artifice or attempting to do so:
- Files a petition under title 11, including a fraudulent involuntary petition under section 303 of such title
- Files a document in a proceeding under title 11; or
- Makes a or fraudulent representation, claim, or promise concerning or in relation to a proceeding under title 11, at any time before or after the filing of the petition, or in relation to a proceeding falsely asserted to be pending under such title.”
For criminal charges, the length of imprisonment and/or fines may vary depending on the nature and circumstances of the offense, whether the offender was a second or persistent felony offender, and the offender’s criminal history. Under 18 U.S. Code section 157, Bankruptcy Fraud is punishable by a fine and/or a maximum of five years in prison. For civil cases, penalties could result in a denial of a debt discharge, meaning creditors can come after the debtor, and loss of exemptions, meaning that certain property that would have been exempt (or “protected”) from collection by creditors will no longer be.
Bankruptcy Fraud is an “intentional” crime, which means that it requires the individual to intend the action or its consequence. One way a defendant may avoid liability from Bankruptcy Fraud is if the debtor can show that their actions were not knowing or intentional. The difference lies in, for example, an individual hiding property from discovery and accountability in a bankruptcy proceeding to avoid its liquidation versus an individual forgetting they owned that property.
Bankruptcy Fraud is governed by federal laws and can be enforced both criminally and civilly. Federal offenses are enforced in New York’s federal district court and bankruptcy court.
On April 6, 2016, Kenneth Bowman Jr. of Mississippi’s indictment was announced for three counts of Bankruptcy Fraud. Bowman’s indictment alleged that he embezzled over $100,000 from the bankruptcy estate of a corporation that was involved in a Chapter 11 bankruptcy petition by using estate funds for his own use. Bowman was an officer and representative of the corporation.